Exile on Wall Street

Soul-searching at Cramer Partners.

At the peak of his Wall Street success, James J. Cramer would get up at 3:45 A.M. at his home, in Summit, New Jersey, and go online and write a short article for the investment Web site he had co-founded, TheStreet.com. Then his chauffeur would drive him to the offices of the hedge fund he managed, at 100 Wall, where he would arrive at his trading desk at 5:30 A.M. and begin working the overseas exchanges. Later in the early morning, he would appear on ABC's “Good Morning America” or CNBC's “Squawk Box,” assailing the camera in his impassioned, hectoring whine as he sussed out the movements of the markets. He would then go back to his company and trade all day, from the nine-thirty opening bell to the market close, at four, making perhaps two hundred moves, sometimes holding stocks for less than a minute. As he shifted millions of shares in and out of the market, he would send off additional pieces to TheStreet.com, and, many nights, he would do another television show. After sleeping for three or four hours, he would begin all over again. In brief, during the fourteen years that Cramer managed his fund, from 1987 to 2000, he tried as hard as anyone could to play the market around the clock, dividing time into smaller and smaller units, each demanding an action either reinforced or cancelled by another action, sometimes only seconds later. His nerves vibrating through bouts of exhaustion, he struggled against the recalcitrance of investment fashion and chance.

Cramer's memoir, “Confessions of a Street Addict” (Simon & Schuster; $26), is an account of an extreme form of exhilaration that turned, by degrees, into a nightmare. Generally successful as a hedge-fund manager, he nevertheless suffered from what he calls “an inability to value myself beyond my last trade,” and agonized over losses of his investors' money. (At its peak, the fund controlled roughly $450 million for about ninety clients.) When things went badly, even for just a moment, he would sweat and curse, shriek at colleagues and brokers, smash telephone receivers on the trading desk, and throw computer monitors to the ground, sending black smoke curling upward in the office. But Cramer, from the evidence of his “Confessions,” is a far more thoughtful and perceptive man than such theatrics would suggest. He knew that he was terrorizing people and came to understand that he was destroying himself. His book is a shrewd self-portrait of a hero who cannot stop himself from becoming a fool—a fool who then seeks redemption by admitting his failures more loudly than a medieval flagellant in a public square. Cramer, it turns out, conceives of investment not just as a way of getting rich but as a vale of soul-making.

Cramer was born in 1955 in a suburb of Philadelphia, where his father worked as a jobber for the National Gift Wrap & Package Company. Cramer's mother, a sculptor, wanted him to be a writer, but he compulsively studied stocks, even as a child. Every day, he marked up a ledger book with prices—”gaming the close,” as he calls it—and, at the age of nine, he was making money in an imaginary portfolio by trading the most volatile stocks and going for quick gains. A scholarship boy at Harvard, he became president of the Crimson, the daily student newspaper, and trained himself to go without sleep, working through most of the night, napping a few hours, going to classes, and occasionally laboring through the next night as well. After college, he went to work as a generalassignment reporter at the Los Angeles Herald Examiner. During that time, a thief repeatedly broke into his bungalow, in the Fairfax district, and eventually cleaned him out. For the next nine months, Cramer slept in the back seat of his Ford Fairmont, a hatchet by his side. He has apparently felt undefended and vulnerable his entire adult life—a victim of other people's malice and ineptitude. Early on, he developed the habits of working harder than anyone else and anticipating the actions of others. Striking first became a form of defense.

In 1982, after a stint at The American Lawyer, Cramer entered Harvard Law School, where he would sit at the back of his classes and pore over the Wall Street Journal, an act of rudeness that he seems to have atoned for, in some cases, by advising his professors on their portfolios. The long bull market, which persisted through the crash of 1987, the pause of 1994, and the brief panic of the fall of 1998, was just getting under way, and Cramer, thoroughly excited, would leave a stock tip on his answering machine, changing the pick on Sunday nights. One of the people who called in was Martin Peretz, the Harvard political-theory professor and the owner of The New Republic. After a month of good returns on Cramer's advice, Peretz insisted that they meet at a Cambridge coffeehouse, where he handed the law student a check for five hundred thousand dollars, instructing him to invest it as he pleased. A few years later, after spending some uneasy time at Goldman, Sachs, Cramer set up his hedge fund, Cramer Partners, with help from Peretz, who induced some of his wealthy friends to invest their money with his protégé.

Although plenty of sane men and women run hedge funds, the funds seem to have been designed for manic personalities. Restricted by government regulation to the wealthy, they employ risk strategies forbidden to mutual funds, such as unlimited stock “shorting,” extensive borrowing, and making enormous bets on single stocks. The management of a garden-variety mutual fund takes a small percentage of the assets; it gets paid whether the fund shows gains for the year or not. A hedge fund like Cramer's, by contrast, takes a management fee of one per cent and no less than twenty per cent of the yearly gains, realized or unrealized. But if the fund loses money the manager doesn't make a dime until he gets back to even, no matter how long that takes.

For Cramer, this was both a point of honor and a source of terror; he ran the fund as if its existence were at stake every day and any loss were a portent of doom. He refused loyalty to any stock, industry, or sector; on one occasion, he emptied out the fund's holdings at a moment's notice and started over. He was tutored in ruthlessness by his wife, Karen Backfisch, who joined him at Cramer Partners after a successful career as a trader at Steinhardt Partners. Backfisch, whom Cramer insists on calling “the Trading Goddess,” taught him tricks like spreading commissions around to a great many brokers—in effect, purchasing information from them that he could use. And she taught him to “trade flow”; that is, to buy the last two hundred thousand shares of a big institutional sell-off (say, a million shares of Microsoft, sold in pieces). The sell-off would drive the price down, allowing Cramer to feed his depressed shares back into the market with gains as other institutional customers rushed in to take advantage of the decline. This sort of bounce-off-the-bottom manipulation requires exact timing, and the book has its share of semi-farcical but harrowing scenes in which Cramer stands on his desk and screams at his traders to buy a certain stock, and then, a few seconds later, screams at them to sell it. The constant mania of “Confessions” borders on exhibitionism, but, as drama yields to psychodrama, exaltation to anguish and then back, the narrative keeps winging along. Cramer is good at re-creating the abrupt shifts and stomach-turning reversals, the steam building up inside his head. A journalistic master of panic, he writes what might be called hardboiled market prose:

Next thing you knew it was down six. In sixty seconds. Like some sort of Mercedes in reverse. I was out of answers. I thought it was plain wrong. We were playing lean, however, and I didn't want to inflict any damage on the pristine year. I listened as someone on the tube yammered that the stock was going lower. I saw the bids disappearing. I saw the loss mounting. I was sweating and angry, shaking my head.

Cramer “played the tape,” taking advantage of whichever way the market was going, up or down, buying and selling for gains of a point or two—or even a half point—at a time. He acted like a day trader with several hundred million dollars at his disposal. His grasshopper approach to investing obviously has nothing to do with building industries or allocating capital in a rational way; its sole purpose is to extract relatively small amounts of gain from each trade—ten thousand dollars here, twenty thousand dollars there. On a good day, the gains can add up to half a million dollars.

As the profitable years went on, however, Cramer's immersion in the market began to ruin his life and his friendships. In “Confessions,” the many passages of boasting are more than matched by passages of the most savage self-contempt. The book becomes a kind of moral suspense story: will Cramer's disgust finally overtake his sense of himself as a success? “I had let my emotions screw me up again and had betrayed someone who had meant no ill will for me, simply because I wanted to be on some television show that I liked a lot,” he remarks wearily. He admits that he talked stocks with Peretz hours after his mother's death and that he took a call from his research director in the delivery room just as the Trading Goddess was giving birth. Perhaps worst of all, he betrayed his benefactor, badmouthing Peretz, who was also the co-founder of The Street.com, in a set of e-mails to one of the Web site's employees, who then sent them to Peretz. When Cramer ran into stock-picking trouble in October of 1998, and was down more than thirty per cent for the year, Peretz paid him back by pulling his money out of the fund; so, apparently, did his wealthy friends. Cramer's Oedipal misery and rage knew no bounds. “I am an idiot, a loser, I don't deserve people's trust,” he intoned to himself at the time, as his fund threatened to collapse.

Peretz had inadvertently created another problem for Cramer four years earlier, when he recommended that he hire Nicholas W. Maier, the son of two of his Harvard friends. Maier, who had recently graduated from college, had no experience in finance, but he wanted to make money quickly. Blessed with the opportunity of a lifetime to do just that, he was nevertheless resentful when Cramer's staff didn't have time to explain things to him and treated him harshly. Still, he stayed until 1998, and has recorded his experiences in “Trading with the Enemy” (HarperBusiness; $22.95). Maier's little volume tells of coping with a volcanic force who posed actual dangers, but it gives the unfortunate impression of having been written by someone with an overly comfortable upbringing: Maier tends to grade people by how nice they are to him. He sets himself up as a man of feeling, in contrast to the bullies and toadies in the office, but, as a literary creation, he is a pale and watery figure compared with the hysterical-oracular Cramer. In any case, Cramer may have been right to berate him for making mistakes. Maier, in the last chapter of his book, had accused Cramer of insider trading. The charge proved to be incorrect, and the publisher had to issue a retraction and pulp four thousand copies of the first printing.

Maier is convincing, though, on what the job did to him physically and morally as he began to imitate Cramer's eruptive style. In an irony that may suggest a lot about the madness of markets, both men—very different from each other and now enemies—quit Wall Street. Cramer pulled out of his 1998 slump, but gave up the fund in 2000, soon after his wife and kids went on vacation without him. For years, he had been nuttily overcommitted, constantly getting into trouble as he spoke and wrote about stocks while running the fund, causing many people to wonder if he was praising or knocking his own positions in order to increase their value or sell them short. He insists that he behaved ethically (the S.E.C. once investigated him and cleared him of any wrongdoing), but the charges wore him down, and he was disgusted by the Internet-bubble euphoria that pushed the value of his own company, TheStreet.com, to a ridiculous and unsustainable price on the day of its initial public offering, in 1999. He had played the I.P.O. game himself, buying shares of semi-worthless companies and “flipping” them after a quick rise on opening day. When other people then did the same thing with his semi-worthless company, he was overwhelmed by the absurdity of it. Cramer is a mass of contradictions, cynical and honest at the same time, a candid and original man rising and falling through American capitalism's giddiest age.

Does Cramer's habit of non-stop trading have any special value as an investment strategy? His fund averaged a twenty-four-per-cent return to his investors, after fees, for his fourteen years—much better than the S. & P. 500 Index's fifteen per cent and the Dow's fourteen per cent. It's a fine performance, but wasn't the thrill and danger at times an end in itself? This may be the one truth Cramer can't bring himself to admit. Other fund managers (George Soros and Julian Robertson, Jr., among them), who worked without bouts of insanity, performed even better; some of those were managers who held stocks for long periods of time, and Warren Buffett, who holds stocks forever, remains the greatest investor of all.

Bellicose, self-justifying, coarse, infantile, lovable, and even, at times, saintly, Cramer resembles Dostoyevsky's hero in “The Gambler,” who hurls himself at the flames because life without risk would be unbearable. For such a personality, losing may offer as great an emotional payoff as winning. Cramer's skill at exposition and at communicating these emotions is finally more notable than his considerable skill at trading. He is the greatest public generator of excitement and knowledge about the market today. (He stills writes for TheStreet.com and has radio and television shows.) When he perceives something—anything—he experiences an irresistible joy in explaining it to whoever will listen. In ten or twenty years, his kind of trading ability will doubtless be replaced by computers, but, as they methodically and quietly pass digits in and out of the market, they will never make us feel anything like the moment-by-moment terror of big money, and, in Cramer's version, life itself, hanging in the balance. ♦

David Denby has been a staff writer and film critic at The New Yorker since 1998.